Busi­ness lead­ers and tax ac­count­abil­ity

Business a.m. - - ECONOMIC DATA -

THE DOM­I­NANT VIEW IN MOST coun­tries is that firms are ex­ces­sively in­volved in tax avoid­ance. The odd thing is that tax avoid­ance, which is also known as strate­gic tax plan­ning (a more ap­pro­pri­ate busi­ness ex­pres­sion), is not il­le­gal. Tax avoid­ance sim­ply means ad­her­ing to the let­ters and not nec­es­sar­ily to the spirit of tax laws. As such, it is deemed wise and ra­tio­nal to take ad­van­tage of loop­holes in tax laws and sys­tems, where such ex­ist.

In or­der to take ad­van­tage of the sys­tem, busi­nesses usu­ally em­ploy an ar­ray of ex­perts – rang­ing from lawyers, ac­coun­tants, to lob­by­ists – to help them im­ple­ment cre­ative tax strate­gies. Some law and ac­count­ing firms have ded­i­cated and lu­cra­tive ser­vices to this tax avoid­ance mar­ket. In their view, strate­gic tax plan­ning can be a real value add to any firm that does it well. Framed as such, it be­comes a source of com­pet­i­tive ad­van­tage and a very at­trac­tive propo­si­tion to many busi­ness lead­ers and share­hold­ers. Hence the pop­u­lar­ity of strate­gic tax plan­ning.

Ob­vi­ously, strate­gic tax plan­ning, as tax avoid­ance, will have neg­a­tive im­pli­ca­tions for tax com­pli­ance and tax rev­enues. That is why tax reg­u­la­tors, col­lec­tors, and ad­min­is­tra­tors do their best to dis­cour­age firms from be­ing too in­no­va­tive with their tax ar­range­ments in or­der to en­hance com­pli­ance and in­crease tax rev­enues. Some reg­u­la­tors have gone as far as ask­ing firms to dis­cuss any in­no­va­tive tax prac­tices they con­ceive be­fore im­ple­ment­ing them. This way, the de­gree of in­for­ma­tion asym­me­try, which is at the foun­da­tion of tax avoid­ance, could be min­imised. Hence, the em­pha­sis on busi­ness tax­a­tion is heav­ily skewed to­wards ways to en­hance com­pli­ance, min­imise tax avoid­ance, and erad­i­cate tax eva­sion.

Tax com­pli­ance has its ben­e­fits. Be­yond in­creas­ing tax rev­enues for the gov­ern­ment, it has also been ar­gued to be a good way to build democ­racy. In other words, tax­a­tion helps to re­store the link be­tween pol­i­tics and cit­i­zen­ship. Through such, demo­cratic pro­cesses and in­sti­tu­tions are strength­ened for so­ci­etal progress. In ad­di­tion, the quest for en­hanced tax com­pli­ance can lead to bet­ter in­for­ma­tion and data man­age­ment sys­tems and en­hance an­cil­lary and com­ple­men­tary ser­vices such as bet­ter polic­ing and strength­ened le­gal sys­tems, for ex­am­ple. These are of­ten re­ferred to as pos­i­tive spill-over ef­fects of en­hanced tax sys­tem.

Whilst com­pli­ance should be en­cour­aged, it be­comes dif­fi­cult to re­alise in a sys­tem char­ac­terised by low trust and weak en­force­ment mech­a­nisms. This is usu­ally the case in most de­vel­op­ing economies, where the for­mal in­sti­tu­tions of democ­racy and cap­i­tal­ism are usu­ally at their worst. Low trust regimes of­ten lead to low tax mo­rale. Weak en­force­ment mech­a­nism of­ten lead to low tax com­pli­ance. This leaves most coun­tries in this sit­u­a­tion in a dou­ble tragedy and brings to the fore the of­ten chal­leng­ing ques­tion of the egg vs chicken co­nun­drum. Un­for­tu­nately, it is not a case of ei­ther high trust or bet­ter en­force­ment mech­a­nisms; the two need to be pur­sued si­mul­ta­ne­ously, but how?

Our on­go­ing study on tax com­pli­ance in Nige­ria con­firms that the coun­try ex­pe­ri­ences both low tax mo­rale and low tax com­pli­ance. Al­though the gov­ern­ment agen­cies – es­pe­cially the Fed­eral In­land Rev­enues Ser­vices (FIRS) – have in­vested a lot in ag­gres­sive com­pli­ance in­fra­struc­ture, there have been some mi­nor progress; how­ever, tax rev­enues are still very much sub-op­ti­mal. This find­ing sup­ports the view in the lit­er­a­ture that tax en­force­ment in­fra­struc­ture needs to be com­ple­mented by en­hanced tax mo­rale. Oth­er­wise pur­su­ing one and not the other comes across as a fu­tile ef­fort to clap with one hand. Un­for­tu­nately, most gov­ern­ments in Africa seem to be in this trap.

One way to raise tax mo­rale is for the gov­ern­ment to be seen to be trans­par­ent and ac­count­able. Cit­i­zens need to know how tax money is used and spent. They need to feel the div­i­dends of tax. In other words, tax needs to pay! But of­ten­times, tax ac­count­abil­ity is the miss­ing part of the jig­saw. From our study, also, the cit­i­zens have a very poor per­cep­tion of the gov­ern­ment in re­la­tion to tax ac­count­abil­ity. It is like pour­ing money into a bot­tom­less pit. They of­ten ar­gue that they pay taxes and are still their own “lo­cal gov­ern­ments” – i.e. they still pro­vide those ameni­ties their taxes should have pro­vided for them if well spent. Some ar­gue that the gov­ern­ment can­not be trusted with more money un­til the gov­ern­ment is able to make bet­ter use of oil rev­enues. But why does low tax ac­count­abil­ity per­sist?

A pos­si­ble and straight­for­ward an­swer to this ques­tion com­ing from our re­search find­ing is the low ca­pac­ity in the pub­lic sec­tor to deal with tax ac­count­abil­ity. In other words, the cur­rent struc­ture does not have a place for tax ac­count­abil­ity. The FIRS Act, for in­stance, only man­dates it to raise tax rev­enues. Be­yond that, it can­not ac­count for how tax rev­enues are used. The min­istry of fi­nance and the min­istry of bud­get and plan­ning ap­pear to be silent on this – per­haps due to ca­pac­ity con­straints. An­other rea­son ad­vanced by in­ter­vie­wees of our re­search is cor­rup­tion. They sim­ply think that the gov­ern­ment is ter­ri­fied by ac­count­abil­ity and would rather keep mute about it be­cause of the cor­rup­tion that goes on in gov­ern­ment. Whether this is true in re­al­ity or not is a dif­fer­ent mat­ter, but the per­cep­tion is as strong and as real as it can be.

Un­for­tu­nately, this lack of trust due to low tax ac­count­abil­ity will con­tinue to im­pede and un­der­mine tax com­pli­ance if not ad­dressed. We sug­gest that one way to ad­dress the chal­lenges of low tax ac­count­abil­ity is for the gov­ern­ment to set up a tax ac­count­abil­ity desk that will be in charge of com­mu­ni­cat­ing and pub­li­cis­ing how tax rev­enues are spent. The other sug­ges­tion is for tax rev­enues to be ear­marked for de­vel­op­ment goals. For in­stance, the gov­ern­ment can have a 10 year plan where one of the Sus­tain­able De­vel­op­ment Goals (SDGs) could be iden­ti­fied a year ahead as the tar­get of the fol­low­ing year’s tax rev­enues. Where and when these com­mit­ments are ful­filled over the sug­gested pe­riod, it would be a very good way to build trust and re­store the so­cial con­tract be­tween the cit­i­zens and the gov­ern­ment.

Be­yond these op­tions, the eco­nomic elites can also vol­un­teer to ask for tax trans­parency and ac­count­abil­ity. It is ar­gued that they pro­vide the largest share of tax rev­enues in most coun­tries. So, it would not be out of place for them to de­mand for trans­parency and ac­count­abil­ity. Whilst cor­po­rate so­cial re­spon­si­bil­ity is on the rise in Nige­ria, tax com­pli­ance and de­mand for tax ac­count­abil­ity on the part of busi­nesses and their lead­ers can con­trib­ute to strength­en­ing tax­a­tion and demo­cratic in­sti­tu­tions in Nige­ria.

The Nige­rian Eco­nomic Sum­mit Group (NESG) now has a fis­cal pol­icy com­mit­tee, which is a de­vel­op­ment in the right di­rec­tion. Hope­fully, this com­mit­tee would be able to gal­vanise busi­ness lead­ers and eco­nomic elites in Nige­ria to make their taxes work for them. There are ob­vi­ous risks har­boured in this sug­ges­tion, but where dan­ger lies, also lies the sav­ing power, ac­cord­ing to Hold­er­lin, a Ger­man poet. And he who comes to eq­uity must come with clean hands. Herein lies the taste of the pud­ding, for busi­ness and eco­nomic elites, so to speak!

This ar­ti­cle is from a study on “How to min­imise tax avoid­ance and en­hance tax com­pli­ance in Nige­ria” led by Pro­fes­sor Amaeshi and fully funded by the In­ter­na­tional Cen­tre for Tax and De­vel­op­ment (ICTDhttp://www.ictd.ac/) of the In­sti­tute of De­vel­op­ment Stud­ies (IDS- http:// www.ids.ac.uk/), United King­dom. Amaeshi is a pol­icy an­a­lyst and full pro­fes­sor of busi­ness and sus­tain­able de­vel­op­ment at the Univer­sity of Ed­in­burgh, United King­dom. He tweets @ke­na­maeshi

Tax com­pli­ance has its ben­e­fits. Be­yond in­creas­ing tax rev­enues for the gov­ern­ment, it has also been ar­gued to be a good way to build democ­racy

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